(MENAFN- Khaleej Times) As dark clouds gather over Europe and growth in the BRIC's slow, the world once again looks to the old steady engine of growth â€" the US. Some analysts are even finding new sources of strength for the US economy to rebound and presumably save the world.
While the US certainly possesses tools to revitalise its economy in the long run, it faces serious challenges in the short term. The US may not be ready to save the day at this point in history.
With election negativity emphasising current weakness in the US economy, contrarians are arguing for an optimistic view of US reinvention and renewal. Sure, unemployment is high and GDP growth sluggish; wage growth low, pension and medical costs threatening public budgets; and China is surging past the US in terms of total output. But there are many positives: Shale gas and oil promise energy security. Food production, droughts aside, is strong in a world that demands more. Educational institutions that attract students from all over the world combine with venture capital in an open society that creates the likes of Google, Apple, Microsoft and Facebook as well as Boeing, Caterpillar, IBM and GE. A combination of a weak dollar, rising Chinese wages and tame wage growth in the US has led to a manufacturing revival. US banks have written off more bad loans than their EU counterparts and bulked up on capital. Demographics favour the US â€" a combination of birthrates at replacement level and migration mean that the work force, and thus total output, will help cover elderly benefits. In contrast, labour forces will shrink in the EU, Japan, Russia and China. In short, it is argued, the US economic outlook is good.
In any discussion like this, it's useful to assess short- to medium-term issues as well as longer-term problems and opportunities. For example, it's true that the labour force will grow in the US, though at a slower rate than in the recent past. However, college and high-school completion rates are not rising and may even fall a bit. In addition, high youth unemployment and poor "starter" jobs often lead to long- term impediments to lifetime earnings. If the US remains stuck several years with high youth and total unemployment rates, the quality and skills of the labour force will suffer. Potential workers may abandon the labour force, perhaps retiring earlier and taking low social-security payments.
Another concern is high inequality. The top tenth of the population has nearly half of all income and 90 per cent of financial wealth. These are near all-time highs. Tax policy has been set so that the share of income paid in taxes overall and especially for the wealthy is near postâ€"World War II lows. Indeed, the very wealthy sometimes pay a lower tax rate than middle-class workers due to a tax code that assesses capital gains and dividends at a lower rate than earnings, though on average the wealthy pay more. This inequality is reflected in lower generational income mobility in the US than in Canada or the UK.
Pessimists point to a battle not just between rich and the poor, but also between young and the old. It would be unseemly and inefficient for the old to take a disproportionate share of resources that could go to education and other services that invest in the future. If infrastructure is also starved, all would suffer. The American Society of Civil Engineers gives the nation's overall infrastructure a "D" grade and estimates it would cost more than $2200 billion to bring roads, bridges, ports, water systems and airports up to standard. This is more than total investment each year, though repairs could be scheduled over several years. In the meantime, costs of congestion, breakdowns, accidents and vehicle damage cost hundreds of billions of dollars a year. Not just money is stuck; organisation and procedures are also arthritic.
Higher user fees and taxes, better efficiency in repair and use, and streamlined procedures for new construction would solve or ameliorate many infrastructure problems. Yet something as basic as storing nuclear waste is emblematic of a stuck system. Nuclear waste, more than 70,000 tons, sits in pools or dry casks around the country, waiting for $24 billion already collected to deliver a permanent site. The new air control system has gone well over budget and is many years behind schedule. With growing air traffic, the 1950s system in place risks being overwhelmed, but part of the new system, supposed to be installed in 2010, may not be operational until 2015. The financial infrastructure is another example of both private and regulatory failure, with heavy lobbying paralysing attempts to limit risk and fraud.
So, the US economy has potential to rebound, but the ability to tap this potential is uncertain. Aside from the Erskine-Bowles deficit reduction plan, which received little support from either party or presidential candidate, there is no serious discussion of how to proceed on necessary, painful, efficient and fair tax increases and spending cuts. Both are needed, along with a sense of purpose and urgency. Neither Tea Party fundamentalism nor plans to target a few rich will solve the problems facing the US.
David Dapice is associate professor of economics at Tufts University and the economist of the Vietnam Programme at Harvard University's Kennedy School of Government
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